“The Leasing Game”
Commitment Fees
There are a few leasing companies and brokers who demand a non refundable "commitment fee" or "application fee" to consider your leasing needs. Such fees are usually only required for major amounts ie $250,000 or more. The fees do have a purpose if legitimately applied. The leasing Co does not want to go through the exhaustive process of analyzing your financial data and giving you an approval only to have you say "forget it". Nor do they want to keep that commitment, rates etc open for you only to find you have decided not to proceed. Usually legitimate leasing Cos either have significant work up costs to develop your credit (in which case the fee will go towards these costs) or will give you a credit for these fees against your first rental once the lease proceeds to funding. A non refundable fee should be factored into the cost of leasing. Beware Lessors or brokers who (& this is pretty rare) take your money with little expectation of finding a funder or getting you approved.
Partial Month Rentals
Small ticket leasing Cos sometimes insist that all leases start at a particular time in the month (usually the 1st) and that if the supplier is to be paid earlier (so you can take delivery) you must pay a prorated rental. i.e. if your monthly rental is $100 (& the equipment cost $3,000) and you want the supplier paid on the 15th of the previous month then the prorated rental would be $50. Sounds fair! In reality your rental as far as the leasing Co is concerned is a payment of principal and interest and so the cost to it of starting you lease on the 15th is probably about 1/2% of $3,000 or $15.
What can you do about it? Tell the leasing Co to start the lease on the 1st of the previous month and pay $100. Your lease will finish one month sooner and save you $49 (in the example).
1st & Last
Most leases call for the 1st & last months' rentals to be paid at the start of the lease. Your sales rep may forget to point this out. If you do your calculations on the basis only the first rental is due or worse that it is due a month later (as in a conditional sale) means you will be underestimating the effective interest rate 1/2%!
Purchase Options
Make sure you get your purchase option in writing!
Effective Cost of Money
Leasing is simply another form of financing albeit with some potential tax timing advantages. The rentals you pay and when they fall due and the residual value have an effective interest rate. Use our Lease Calculator (courtesy TimeValue) to confirm the interest rate quoted is indeed correct. If you are told this is a lease and there is no interest rate simply say "rubbish" and move on!
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